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Supplier discount: pay now or pay on terms

Did a supplier offer a discount for paying now? Find the interest rate hidden in the terms, compare it with what your cash earns and with the cost of a loan, and see how much the business gains or loses with each choice.

Educational simulation. Not investment advice. Results are estimates based on the data you enter and do not replace advice from a qualified professional.

Reviewed on Oct 31, 2026

Example values for a purchase of goods.

Your money

After-tax return of a liquid investment. Cost of credit: the rate the business would pay if it had to borrow to pay now.

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—Interest hidden in the supplier’s terms
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Hidden interest by discount

Monthly rate the supplier charges for waiting, for each early-payment discount, compared with the return on cash and the cost of credit.

Tap the chart to see the values.

What each choice costs in today’s money

Present value of what the business pays on each path, discounted at the return on cash.

Tap the chart to see the values.

Pocket table: monthly interest by discount and term

Single payment at each term. Green: pay now with cash (interest above your return); red: better to pay on terms.

Payments

The summary lists your inputs, results, formulas, assumptions and sources. The full report also includes the charts and interpretations, in color. In the print dialog, choose Save as PDF.

Method, assumptions and sources

Formulas

Hidden interest: monthly rate i that makes amount × (1 − discount) equal Σ payment ÷ (1 + i)^(days ÷ 30)
Single payment: i = (1 ÷ (1 − discount))^(30 ÷ days) − 1
Gain from paying now = present value of payments on terms (at the return on cash) − cash price
Pay now with a loan: interest = cash price × ((1 + cost of credit)^(average term in months) − 1)

Assumptions and limits

  • Taxes on the loan are not added, the return on cash is entered after tax, and the risk of running short of cash for other bills is not modeled.
  • The decision also depends on the cash available for other obligations.

Official sources and references

  • Brealey, Myers & Allen. Principles of Corporate Finance (trade credit and the cost of forgoing discounts). McGraw-Hill.
  • U.S. Small Business Administration, manage your finances.

Frequently asked questions

What interest is hidden in a 2% early-payment discount?

For 30 days, about 2.04% a month, or 27% a year, well above what conservative investments pay. With “2/10 net 30” the gain is only 20 days, so the hidden rate is even higher, about 3.1% a month: choose a single payment at 30 days and enter 10 in “Days to pay with the discount”.

Is it worth borrowing to pay a supplier early?

Yes, if the interest hidden in the supplier’s terms is higher than the effective cost of the loan, including fees.

How do I read the default example?

On a $50,000 purchase in 3 installments at 30, 60 and 90 days, a 4% discount for paying now equals 2.07% a month of hidden interest. Since cash earns 0.35% a month, paying now is clearly better, and with a loan at 1% a month it is still worth borrowing to do it.

How do I calculate the interest on terms?

Find the rate that makes the discounted cash price equal to the payments on terms. For a single payment: (1 ÷ (1 − discount))^(30 ÷ days) − 1 per month.

When is it better to pay on terms?

When the hidden interest is lower than the return on your cash, or when paying now would leave the business short for other bills.

Where do I get my return on cash and cost of credit?

The return is what your business savings or money market account pays after tax; the cost of credit is the effective rate your bank would charge on a working capital loan, including fees.

Does the calculator include taxes on the loan?

No transaction taxes are added. Enter the all-in effective rate of the loan so the comparison is fair.

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Supplier early-payment discount: when it pays off

Many suppliers offer a discount for paying early, such as “2/10 net 30”: 2% off if you pay in 10 days, otherwise the full amount in 30. Skipping the discount means paying for 20 extra days of credit, and the hidden interest is often much higher than it looks.

The hidden interest

For a single payment: monthly rate = (1 ÷ (1 − discount))^(30 ÷ days) − 1. With 2% and 20 days, that is about 3.1% a month, or 44% a year. For installments, the calculator finds the rate that makes the discounted cash price equal to the payments.

DiscountDays gainedHidden interest
1%301.01% a month
2%302.04% a month
2%203.1% a month
4%602.06% a month

How to decide

If the hidden interest is higher than what your cash earns, pay now with your own money. If it is higher even than the cost of a working capital loan, it pays to borrow to take the discount. If it is lower than your return on cash, keep the money and use the supplier’s terms.

Watch your cash

Paying early only makes sense if it does not leave the business short for payroll, taxes and other bills. Check your cash flow before committing.

For terms like 2/10 net 30, enter 10 in “Days to pay with the discount”: the calculator then counts only the 20 extra days you are really financed.